Oil prices have largely faded into the background of market noise over the last couple of years. Prices have been relatively steady in the $40-$60 range for some time, and the market has stopped focusing on it. However, any big change in oil would immediately grab attention. With that in mind, Bloomberg has put out its oil forecast for next year. The forecast is for US prices to fall to and average $55 per barrel next year as US oil production hits new records. The big question is whether demand will be strong enough to devour all that new oil.
FINSUM: This could be another dangerous year for oil. US output will rise, which could break the back of OPEC’s coordinated supply cuts, which have effectively created a price floor for oil.
Good news if you are long oil: OPEC has decided to extend its cuts. While the rise in the oil market has been long and slow, prices are currently around $60, which was apparently enough to push OPEC to maintain its output cut. However, there is a measure of discord between Russia and Saudi Arabia. Russia is not as reliant on higher oil prices as Saudi Arabia, and it does not want to concede too much market share to rivals by keeping production low. Therefore, it appears to favor an earlier exit of the current agreement than the Saudis.
FINSUM: Oil looks okay for now, but in the long-term we think this agreement will likely collapse because of pressure from Russia and the ever-growing US shale industry.
Oil has been doing well lately, putting a smile on the faces of traders and the shale industry and a grimace on the faces of everyday Americans. Well, Barron’s says the grimace won’t go much longer, as this oil rally is bound to fade. Oil is almost back to $60 after reaching $44 in July. However, for it to move any higher the market would need to be banking on geopolitical supply disruptions, which seems like a long shot to rely on.
FINSUM: The fundamental demand and supply picture simply don’t justify prices much higher than now, so we don’t think this run will be able to maintain its momentum.
Everything seems to be in boom mode right now despite the fact that markets and the economy have been decent for some time. One very positive sign for the markets is that commodities have been on the rise despite a long period in the doldrums. Metals and energy have both been doing well despite the structural issues that have plagued the sector for years. Oversupply seems to to have been quelled in oil, and inventories of various metals, such as nickel, have shrunk, leading to a price boom.
FINSUM: High demand for commodities is a very strong sign of economic expansion, so we take this as a reliable indicator that the economy may start to deliver on all the hype. Inflation to follow?
Gold has had an interesting ride the last few years and is currently in the midst of a strong year. However, its recent performance may pale in comparison to what comes next, at least according to Barron’s. Barron’s says gold has the best risk/reward ratio of any asset class today, and that even if other asset classes keeps rising, gold investors will do well. They may really hit it big if we have another crisis, though. Additionally, fundamental factors like supply are waning, which should move the equilibrium price of gold up. The metal is up 11% so far this year.
FINSUM: Gold’s valuation certainly isn’t as lofty as many other assets classes after years of weak performance. But then again, gold’s value is so abstract it is hard to talk about valuation on a meaningful basis.
Gold has had a good year. Up 15% through early September, it had unexpectedly risen alongside shares for solid gains this year, though it has slumped considerably since. Now a slew of factors may be conspiring to take it down further. The big risk is of the Fed hiking rates even though inflation is weak. That has historically been bad for gold, as any time rates move higher it weakens gold as its zero-rate return looks less favorable. Low inflation also reduces gold’s attractiveness as a hedge, meaning a hike during a low inflation period is essentially a double-whammy against gold. Finally, rate hikes would strengthen the Dollar, another factor that would hurt gold demand by making it more expensive for overseas buyers.
FINSUM: If Yellen and the Fed stick to their rhetoric, then gold looks set for some sure losses.